Despite the mushrooming civil war in Iraq, led largely by the insurgent organization known as the Islamic State in Iraq and Syria (ISIS), Americans are paying scarcely more to fill up their cars today than they were a month ago. This is especially surprising, considering that Iraq is the world’s fifth-largest oil-producing nation.
On May 27, the average gallon of gas in the United States cost $3.65, and the average barrel of West Texas Intermediate crude was $105.80. One month later, with ISIS in control of a huge swath of Iraq’s territory (including that nation’s largest refinery), the price of WTI was 20 cents lower at $105.60, while gas prices were up a whopping 3 cents at $3.68.
So, what gives? How can the 3 million gallons Iraq produces every day be under serious threat and there be so little impact on crude and gasoline prices in the United States?
American Economy Less Susceptible to Oil Price Volatility Than in the Past
One of the quiet byproducts of the boom in U.S. oil production driven by unconventional drilling is that American’s exposure to oil price volatility caused by geopolitical events has been reduced – at least for now. Still, how long American motorists can continue to see stable pump prices is a matter of debate.
Securing America’s Future Energy, a non-profit policy advocacy group backed by military, business and transportation industry leaders, suggested in a recent report that the loss of only one-third of Iraq’s oil could push global crude prices up by another $40 a barrel by summer’s end. That would translate into Americans paying close to $5 a gallon to fill their tanks for Labor Day trips. But others scoff at the possibility of such an unprecedented jump in gasoline prices – at least in such a short period of time – even if the entire flow of Iraqi oil is shut off.
Oilman T. Boone Pickens noted in a Fox News Channel interview on June 27 that increased production of U.S. oil since the historic low of 5 million barrels a day in 2008 now offsets the amount of threatened Iraqi oil. This year U.S. producers will pump nearly 8 million barrels of oil out of the ground each day. Originally, OPEC projected Iraq would produce 4 million barrels of oil each day this year. The oil ministry, however, has lowered its projections to around 3 million barrels a day. And that was before ISIS made it bold, swift move to take control of about a third of the nation.
Iraq Promises Civil War Won’t Impact Oil Production
Iraqi Oil Minister Abdul Kareem al-Luaibi has sought in recent days to calm fears that Iraq’s oil production is seriously endangered by the civil war in his nation. He has even suggested that production actually has increased over the past month as ISIS moved quickly to gain territory in northern and western Iraq.
Pickens now says Iraq “will be doing good” to produce 2 million barrels a day, and that number could drop dramatically should ISIS forces seize big oil-producing lands in Southern Iraq. Still, the gains in U.S. production are serving as a buffer, at least in the short term, against the kind of supply disruption that could send pump prices soaring higher.
But Pickens concedes that should Iraqi oil production follow the path of Libyan oil production after the fall of its former dictatorship, crude oil prices conceivably could reach the $150- to $175-a-barrel range, though not as quickly as some have suggested. “It’s a dicey situation because it’s a civil war,” he said. “But I don’t see how you get to $5 that fast.”
Other Factors Keep Price Escalation at Bay
There are other factors at work also working to keep oil price escalation at bay, at least for now.
OPEC officials have tried to assure markets that other member nations can and will make up for any lost Iraqi oil production. Such assurances, however, are not accepted without skepticism, because other OPEC members face serious production problems as well. Venezuela’s oil production has slumped badly in recent years under the socialist rule of first the late Hugo Chavez and now his hand-picked successor Nicolas Maduro. Meanwhile, oil production in Nigeria and Angola is under constant threat from anti-government terrorists and rampant internal corruption.
A weak U.S. domestic economy also is helping to keep the lid on prices at the gas pump. The Commerce Department’s late June revision of first quarter GDP numbers has economists and investors alike worried. The government initially reported that USGDP grew a 0.1 percent, a worrisomely low amount, then revised it sharply downward to a negative 2.9 percent. The Obama Administration sought to blame exceptionally bad first-quarter weather, while Republicans argued that such a huge negative swing could not be entirely caused by weather. On the heels of that GDP revision is another report showing a 1 percent drop in durable goods orders in May, causing energy investors to fret that a weakening economy will depress demand for gasoline and other refined products. Declining demand typically is a drag against rising oil prices.
Still, there’s strong evidence of the pressure being placed on oil prices by the Iraqi civil war. And it’s seen best in the extended futures market. Though prices for oil delivered in August and September have fallen slightly in recent days, prices are spiking for contracts on oil to be delivered three and four years out. That activity points to investors worrying that a prolonged disruption in the export of Iraqi oil will, over time, swamp the United States’ – and the world’s – ability to offset that lost production, leading to a slower-building but longer-lasting up cycle in the price of oil and refined products.
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